It is no secret that personal and corporate lending has stagnated over the last five years. The credit that our businesses and households need is simply not as available as it was. We desperately need a strategy from Government that combats one of the main causes of this contemporary restriction in lending: unprotected and unaddressed credit risk.
ResPublica’s latest report, Risk Waiver: closing the protection gap and opening the credit flow, explores how the Government and financial industry could better utilise protection products to reduce credit risk and unlock lending to consumers and businesses.
Lending matters for the economy - it matters a lot. The total gross lending in the UK plummeted from £140.5 billion in the second quarter of 2007 to £60.7 billion in the final quarter of 2012, a reduction of 57 per cent, compared to the lending volume before the credit crunch. Studies in both the U.S and the EU have shown that falling credit supply shrinks real GDP growth.
Five years after the credit crunch, a U.S study has found that if core lending declines by 4 per cent, then real GDP reduces by 0.6 per cent. A European paper studying the same effect found that, in the Eurozone, if core lending declines by 5 per cent there is a long-term reduction in real output growth of 1.6 per cent. Transposing those findings to the situation in the UK gives startling indications of the possible impact on our economy of credit contraction.
Given that the UK’s 2012 GDP was £1445 billion, the American study would suggest a real output loss for the UK between 2007 and 2012 of £123 billion, whereas the European paper would suggest a loss equivalent to £263 billion. On a conservative estimate, since our economy is closer to the Eurozone, placing the UK directly between both studies, the loss in GDP from the contraction in lending between 2007 and 2012 was a staggering £193 billion.
It is surprising given the impact that consumer spending has on the economy, which accounts for some 65% of UK GDP, that so little thought has been given to reviving it. It is almost as though, given the current debt crisis, we have given up on thinking how credit might be used and delivered differently. Not only is household spending some way down on its pre-recession levels, household credit availability is also 55 per cent down over the same period. With an increase in the number of part-time workers in the economy, partnered with what will soon be a ‘lost decade’ in take-home pay, now more than ever households rely on credit not just to answer their immediate cashflow problems but also to start a business, fund education or even move from areas of high unemployment to ones where work is available.
Current Government attempts to resuscitate lending have focused on keeping interest rates low for all debtors and flooding the business sector with large-scale pump-priming schemes, such as Funding for Lending or the Enterprise Finance Guarantee Scheme. So far, these schemes have failed to generate anything like the increases needed, and an area of extreme concern is the funding for Small and Medium Sized Enterprises (SMEs). Not only has SME lending fallen by 25 per cent since 2009, but loan rejection rates in the UK are twice that of our greatest European competitors, France and Germany. Given that SMEs represent 60 per cent of private sector employment and 50 per cent of private sector turnover and almost all future jobs, a failure to lend to SME’s is fatal to the economy’s hope for growth and jobs.
Dr Samantha Callan is Associate Director for Families and Mental Health at the Centre for Social Justice.
Six years ago the Centre for Social Justice (CSJ) presented David Cameron with Breakthrough Britain, a blueprint for the social recovery of the UK. Tackling family breakdown was at the heart of the prescription for reversing social breakdown. The then Leader of the Opposition responded to this report with an unequivocal endorsement of the need for family stability and the importance of marriage.
He went into the general election promising to do everything in his power as Prime Minister to lead to the most family-friendly government ever. Despite his genuine resolve, when it comes to the most pressing family policy priority of improving stability there is very little to show from that rightly ambitious rhetoric.
Our report, Fractured Families: why stability matters, published later this week, makes this lack of delivery depressingly clear. Since 2010, the formation of lone-parent families has continued to rise, unabated, at a rate of 20,000 per year. By the time of the next election, we will have crashed through the two million barrier. The CSJ would be the last organisation to indulge in lone-parent bashing; our Alliance of several hundred grassroots charities tackling social breakdown works day in, day out, with parents raising children on their own. They are the ones who tell us how tough it is, how much harried mums (only eight per cent of those raising children on their own are dads) would appreciate an extra, reliable pair of hands in the home on a permanent, committed basis.
James Barty is head of financial policy at Policy Exchange.
When the last Labour government bought the stakes in the banks back at the peak of the financial crisis it did so to prevent a meltdown in the financial system. The idea was to provide RBS and Lloyds with enough breathing space to repair themselves, with the eventual objective of returning them to the private sector. We believe that process is nearing completion. The banks have delivered, increased their liquidity and built up their capital. Both returned to profitability in the first quarter of this year. Now is the time, therefore, to decide how to return them to the private sector.
In a paper published today we, at Policy Exchange, have examined the options open to the Government to do this. Up until now, the idea has been to privatise the banks in stages through sales to institutions. It was reported yesterday that the Treasury is considering doing this for up to 10% of Lloyds later this year. We think there are two main problems with this approach.
First, it takes too long to privatise the banks in this way. 10% of Lloyds is only a quarter of the Government's stake. Since there would have to be a gap (of we think at least a year) between such sales, at best it could sell half of its stake ahead of the election. For RBS the numbers would be much lower, and the Government would still be the majority shareholder by the time of the next election.
Second, the shares would likely have to be sold at a discount to attract buyers, since the government is known to be a seller.
Turning an institutional offering into a traditional privatisation might get more shares sold but would still require a discount and would, in our view, be quite risky given the size of the likely offering. Equally, we think the idea of giving the shares away, as proposed by Nadhim Zahawi, is unworkable because of the cost.
Tom Papworth is Associate Director, Economic Policy, CentreForum. Follow Tom on Twitter.
This is the fourth article in ConservativeHome’s week-long series on the Spending Review, and follows those by Peter Hoskin, Sean Worth and Mark Wallace. It is intended to be a “yellow” account of what should be in Review to go against the “blue” account that Policy Exchange's Sean Worth wrote on Tuesday.
Deficit reduction has been the key policy of the coalition. Despite siren calls from disgruntled former spokesmen, getting public spending under control and not bequeathing crushing debt to future generations is a basic liberal principle. The coalition is right to continue the project of consolidation, but the way the government has gone about it has been poor.
Firstly, George Osborne and Danny Alexander deserve credit for designing a fiscal consolidation that broadly aligns with economic best practice: empirical evidence shows that a ratio of 4:1 spending cuts to tax rises appears to correlate with the fastest and strongest recoveries; raising taxes to fund government spending is counter-productive. But the phasing has been all wrong. Osborne introduced the tax rises up front, while the spending cuts have dribbled in over time. It would have been both economically sensible and politically expedient to get the pain over as early in the parliament as possible and give the economy as much time as possible to recover. The political opportunity is now passed, but the economic logic remains. The remainder of the cuts should be introduced promptly, while further tax rises should be avoided.
There is remarkably little economic commentary on the shadow economy. This is possibly because, by its nature, it is difficult to measure. Survey evidence tends to under-estimate the shadow economy because many respondents either do not wish to reveal their activities or they convince themselves that their activity is legal.
However, there are some more sophisticated ways of estimating the shadow economy than simply asking people. And, if we examine the latest research, the figures are quite alarming. In the UK, about 10 per cent of economic activity is unofficial. In Mediterranean countries, the figure is about 20 per cent. Some supporters of a free economy might be in two minds about this. For some people, the shadow economy is a great example of free, untaxed endeavour. Indeed, where I live, the smugglers of past centuries were known as “free traders” and they are still commemorated by the uniforms that the bonfire societies wear on November 5th. In Europe, the size of the shadow economy seems to be correlated with Catholicism; in Britain, support for the shadow economy seems to be correlated with enthusiasm for burning Catholics.
This is the second article in ConservativeHome’s week-long series on the Spending Review, which began yesterday with one by Peter Hoskin on the Government’s inability to count. It is intended to be a “blue” account of what should be in Review. In the spirit of Coalition, the think-tank CentreForum will present a “yellow” account later this week.
Spending reviews mid-way through an election cycle should be about communicating responsibility and steady progress, as the space for more radical thinking lies ahead in the coming election campaign. This one, however, is politically more important and there are seriously thorny and controversial issues that need grasping.
The first reason is that the Spending Review is earlier in the Parliament than originally planned and only covers a year into the next one. This allows the Coalition parties the space to progressively build the separate platforms they’ll need for the 2015 election, including campaigning against each other over differences like welfare and defence spending, if either were to form a new government (or different coalition). Expect a lot of fun and games on that front in future.
In fact, we all work for the government because the taxes we pay support its activities. For most of us that includes income tax and National Insurance. For some it includes tobacco duty, alcohol excise duty and fuel tax. For all of us it includes VAT, and for most it will include council tax. The list of the different taxes we pay to fund government is mind-bogglingly long, but the Adam Smith Institute has painstakingly listed and costed them all, as it has done for 25 years in order to calculate how long we spend working for the government.
The good news is that the average person in the UK ceases to work for government from today. In other words, today, May 30th, is Tax Freedom Day, after which people start working for themselves. The concept is a simple one. We add up all the taxes, direct and indirect, visible or stealth, and work out what they amount to as a proportion of the UK's net national income. This year it comes to 41.5 percent. That same percentage, expressed as a proportion of days in the year, comes to 150 days. So, if we had paid everything to the government since January 1st, it would have taken 150 days before the average person had paid the amount the government takes from them each year.
By Rory Meakin, Head of Tax Policy at the TaxPayers' Alliance
Google, Apple and Starbucks have all recently been enjoying the attention of the House of Commons Public Accounts Committee or equivalent bodies in the US Senate. Committee Chair Margaret Hodge even said that it is 'evil' of Google to fail to arrange its affairs in a way that would result in it paying more tax than it is required to. But however silly some of the claims in Parliament might be there is genuine and justified anger about a tax system that very few of us really understand.
Whether it's Google executing its sales in Ireland thereby creating profit there instead of here, Apple leaving its profits outside the US's taxman's reach or Starbucks UK paying a management fee for sales made using the brand, most people agree that the system we have now doesn't make sense in a world of multinational companies, intellectual property and the internet. How much UK tax should companies like Starbucks and Google pay with a fairer system? Are they getting away with paying too little?
There is compelling evidence in a new report, Work Longer, Live Healthier: The relationship between economic activity, health and government policy, from the Institute of Economic Affairs and Age Endeavour Fellowship, that Sir Alex Ferguson may have more than one reason to regret his decision to stand down from Manchester United at a youthful 71 years of age.
Although he will feel good for a few months, in the long-term the impact on his health from not spending each Saturday shouting referees into favourable decisions will be negative. The same will be true for most of us – particularly if we choose early retirement.
For example, the research finds that the employment rate for men aged between 55-59 fell from over 90% to under 70% between 1968 and the late 1990s. From 80% to 50% for those between 60-64, and 30% to 15% for those between 65-69. This whilst both life expectancy and healthy life expectancy were rising.
Everyone in Westminster is talking about UKIP. The purple surge that we saw in last week’s county council elections has got political anoraks talking. The Prime Minister needs to secure his core supporters with more of a focus on immigration, crime and the EU, say some. Others urge Cameron not to ape Farage as he won’t be able to out-Kip a Kipper. They’ll just come back to the table asking for more.
I personally don’t think there is a one-size-fits-all strategy for dealing with the Ukip problem. And here’s why.
General Elections in the UK are won and lost in only a handful of seats. This week, I asked my brother-in-law, a data-set wizard, to pull together some figures showing the core marginal seats that will be up for grabs in 2015. There are 108 of these marginal constituencies where the majority is less than 6%. Ukip will have a major say in at least 53 of these based on its share of the vote in 2010 (i.e. the party’s vote share is larger than the majority in that marginal).Retention Plays
The Conservative party is incumbent in 24 of these seats, all but five of which are Tory-Labour battlegrounds. There is no doubt that MPs such as Jackie Doyle-Price in Thurrock, Eric Ollerenshaw in Lancaster and Fleetwood and David Mowat in Warrington South have a fight on their hands come 2015. They are under threat from UKIP eating into their very small majorities. However, they have to be conscious of another, arguably more dangerous problem – Labour eating into the Lib Dem vote as disillusioned progressives decide to back Miliband. Lord Ashcroft’s polling earlier in the year found that two fifths of Lib Dem voters from 2010 have switched to Labour or the Greens. And of all defectors from the Libs, those switching to Labour are the most likely to say they are sure how they will vote.
If, as a result of making overtures to Ukip, the Lib Dem vote breaks disproportionately for Labour, then holding onto seats in the North West and Midlands will be especially difficult for the Conservative incumbents.
However, a different approach might be required in other regions of the country. In the four Lib Dem battlegrounds down in the South West, for example, the local Conservative associations probably need to hold the vote and entice transient Kippers back into the Tory fold. Perhaps a more robust right-wing strategy is called for in the South West?
Fighting the Labour machine
As with the retention seats, the critical issue in the 15 constituencies that the Conservatives have to take from Labour to stand a chance of winning an overall majority at the next election, is how the Lib Dem vote will break for the Conservatives and Labour.
Tacking right probably won’t satisfy the 8.5% of voters who voted Ukip in Dudley North. And it will have the added effect of possibly pushing Lib Dem voters into the arms of Ed Miliband and Labour. However, any defections to Ukip will kill the chances of Tory gains in the Midlands and North West. This is an unenviable Catch-22 for the party machine.
There is no one-size-fits-all strategy for dealing with the Ukip problem. Party strategists have to ask themselves what is the biggest risk: Conservatives defecting to Ukip, or former Lib Dems breaking disproportionately for Labour?
For what it’s worth my advice to David Cameron would be to forget about the various electoral connotations and focus on leading the country. Elections are increasingly decided on competency as Policy Exchange’s report, Northern Lights, found last year. As every good business leader understands, you need to be aware of what the competition is up to and be prepared to second guess their next steps. But a good leader also sticks to what they think is the right course of action, even if others – including friends – disagree.